Capital Budgeting Of ITC Company limited

Name: Miss Rama Vijay Sardesai

Class: M.COM Part – II
Subject: Investment And Financing Decisions
Roll No: 2015
College: Narayan Zantye College of Commerce
Academic Year: 2019-2020

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 INDEX
Sr. No Contents Page No
1 Capital Budgeting: Meaning 3
2 Profile of ITC Company(introduction) 3
3 Capital Budgeting Techniques :Types 4
and Meaning
4 Pay Back Period Method Used by ITC 5-7
Company
5 Net Present Value Method Used by ITC 8-10
Company
6 Conclusion 11
7 References 11

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ITC COMPANY LIMITED
Capital Budgeting:
Meaning:
Capital budgeting is the process a business undertakes to evaluate potential major projects or
investments. Construction of a new plant or a big investment in an outside venture are examples
of projects that would require capital budgeting before they are approved or rejected.

As part of capital budgeting, a company might assess a prospective project's lifetime cash
inflows and outflows to determine whether the potential returns that would be generated meet a
sufficient target benchmark. The process is also known as investment appraisal.

Profile of Company:

Introduction:
ITC - Creating Enduring Value for India As a Company deeply rooted in India's soil, ITC is
inspired by the opportunity to serve a larger national purpose and create enduring value for its
stakeholders. This abiding vision has spurred innovation, creativity and vitality to ensure a
substantial and growing contribution to the Indian Economy, whilst simultaneously contributing
significantly to enhancing environmental capital and sustainable livelihoods. ITC’s aspiration to
create enduring value has been powered by strategies that have focused on: Leveraging
enterprise strengths to create Multiple Drivers of Growth with a robust portfolio of future ready
businesses Building world-class Indian brands that Create, Capture and Retain Growing Value in
India Making Societal Value Creation an integral part of its journey of growth Investing in
Creating Assets for the Nation in the critical areas of agriculture, manufacturing and services
Creating World-Class .

I TC Limited is an Indian multinational conglomerate company headquartered in Kolkata, West

Bengal.[5] Established in 1910 as the 'Imperial Tobacco Company of India Limited', the
company was renamed as the 'India Tobacco Company Limited' in 1970 and later to 'I.T.C.
Limited' in 1974. The dots in the name were removed in September 2001 for the company to be
renamed as 'ITC Limited' where 'ITC' would no longer be initialize. The company completed
100 years in 2010 and as of 2012–13, had an annual turnover of US$8.31 billion and a market
capitalization of US$52 billion. It employs over 30,000 people at more than 60 locations across
India and is part of Forbes 2000 list.

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Capital Budgeting Techniques:
(A) Traditional methods (or Non-discount methods)
(B) (i) Pay-back Period Methods (ii) Post Pay-back Methods (iii) Accounts Rate of Return (B)
Modern methods (or Discount methods) (i) Net Present Value Method(ii) Internal Rate of
Return Method (iii) Profitability Index Method
(C) Traditional Methods: Payback period method: The term pay back refers to the period in
which the project will generate the necessary cash to recoup the initial investment. Initial
investment
(D) Payback period = Annual cash inflow Accept or reject criteria The payback period can be
used as criteria to accept or reject an investment proposal. A project whose actual payback
period is more than what has been predetermined by the management will be straight away
rejected. Taking into the account the reciprocal of the cost is the maximum acceptable
payback period.
(E) Accounting/Average Rate of Returns: Average rate of returns is average of the net profit after
taxes over the whole of the economic life of the project are taken. Under this method return,
is expressed as percentage of capital or investment. Accounting rate of returns may be
calculated using any one of the following formulas. Average net profit after tax
(F) ARR = Average investment The amount of average net profit after taxes and “Average
Investment” are calculated as Total net profit after taxes.
(G) Discounted cash flow techniques:
1. Net present value method NPV is considered the best method or evaluating the capital
investment proposals. In case of this method cash inflow and cash out flow associated with
each project are first worked out. The manager then calculates the present values of these,
cash inflow and out flows at the rate of acceptable. This rate of return is considered as the cut
off rate and is generally determined based on cost of capital. Cash out flows represent the
investment and commitment of cash in the project at various points of time.
2. Profitability Index: Profitability index is one of the methods of evaluating the investment
proposal. It is also called as benefit cost ratio and measures the relationship between present
values of cash out flows and cash inflows. Thus, it can be calculated by using formula.
Present value of inflow Profitability index.
3. Internal rate of returns: Internal rate of return is that rate at which the sum of discounted
cash inflows equals the sum of discounted cash out flows. In other words, it is the rate which
discounts the cash flows to zero. It can be stated in the form of a ratio as follows Cash
Inflows.

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Conslusion:
1. In ITC-PSPD there is no debt in the capital structure that means the interest outflow are totally
nil. In view of the above ITC-PSPO has calculated NPV by discounting at 12%.

2. ITC PSPD is the parent company is No.1 paper production in India. Especially they are
pioneered in the premium products. This has helped them in capturing exports markets. So the
capital investment is in this company enrich good sales and they are by good returns.

3. In this organization capital budgeting technique are being implemented even for capital assets
which are having values lesser than 7 lakhs.

4. They invest the maximum capital production, development and equipment and attraction of
machines and to develop them for best utilize.

5. They maintain check list for every scheme even to minimum valued and minimum valued.

6. Simple pay back should not be more than 36 months and NPV at 5 year period should be
positive particularly in the small investments.

7. Further there is substantially growth in paper industry. This will enable the company to
increase sales there by maximum the profits.

8. Only two techniques of capital budgeting are implemented.

Referances:
 https://www.investopedia.com/financial-term-dictionary-4769738
 https://en.wikipedia.org/wiki/ITC_Limited
 file:///C:/Users/USER/Downloads/71673696-Itc-Srinivasarao.pdf
 https://www.itcportal.com/about-itc/profile/history-and-evolution.aspx

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